The present subject matter relates generally to a trading system and method. More specifically, the present invention relates to a trading system that facilitates a “target” trading process.
Traders may place orders through trading software. Within trading software, there are typically various methods of order-entry. Specifically, traders specify what tradable instrument they would like to trade; they specify the amount they would like to trade; they may specify the desired route that the order should take to market; they may specify when they want to place the order, as well as other optional order features. Even though the exact components of the order-entry process vary by trading system and scenario, and even though the processes may be specified or planned in advance, the order-entry process itself is typically a process all traders use to get their orders to market. The current steps that make up the order-entry process in today's trading software, as well as the user involvement it requires, is the main topic of the background of the invention.
The term “tradable instrument” or “tradable instruments” mentioned above and used herein may refer to stocks, bonds, currencies, commodities, warrants, options, futures, spreads, synthetics, FOREX contracts, as well as any other type of tradable instrument, Further, other types of tradable instruments not specifically mentioned herein, or developed in the future, shall also be included as part of the term “tradable instrument” or “tradable instruments.”
There are times when a trader's focus on orders and order-entry is really not a problem at all. For example, let's assume that a trader who trades DELL stock starts the day with zero shares of DELL. If his “target” is to own 500 shares of DELL, he simply places an order to buy 500 shares. Note that in this simple example, the trader focused on the order that was required to be sent, and that order was to buy 500 shares of DELL. However, more complex situations arise. Let's focus on a slightly modified version of the above example. Let's assume that a trader, already owning 500 shares of DELL, decides that he wants to own a total of 2,000 shares of DELL. We can consider this figure of 2,000 shares to be the trader's target position. In order for the trader to reach his target position, he again has to focus on the order he has to place, and that order is to buy 1,500 shares of DELL. The trader knew that his target was to own 2,000 shares and so he had to subtract the amount of shares he already owned from his target position, an extra calculation step, to reach the number of shares required for his order. In another example, a trader may wish to liquidate part of his position, i.e. go from a currently position size of 3,400 shares to a target position of 300 shares, in which case he has to sell 3,100 shares, this quantity also achieved via calculation. In still another example, a futures trader may wish to reverse the side of the market he is on. If he currently holds 17 contracts short, but wants to get to a target of 47 contracts long, he must buy 64 contracts, the quantity again achieved via calculation. The requirement that traders have to focus on the type of orders required (buy/sell/short/cover) as well as having to calculate order quantity, instead of simply focusing only on the desired target position(s) to be held when the process is complete, is typical in today's trading software.
A portfolio includes one or more positions. Further, each position includes a tradable instrument, a quantity of each tradable instrument, as well as a side of the market each position is on (long or short). In some systems, such as systems for managing cash accounts, wherein account holders may never enter short positions, there may be no side of the market variable, as the side may be inherently understood to be on the long side of the market. Further, in alternative scenarios, the quantity associated with each tradable instrument may be positive for long positions and negative for short positions, in which cases it is implicit that the side of the market position is either long or short (in these instances, the side of the market may not need to be explicitly included as part of each position other than by the negative or positive number).
A portfolio may be a currently held portfolio of one or more positions, a theoretical portfolio of one or more positions, a portfolio of one or more positions held in the past, a portfolio of one or more positions to optionally be held at any point in the future, a portfolio not intended to be held, but rather to be used for benchmarking purposes, etc. There are endless types and uses of portfolios. The tradable instruments held in a portfolio may span any asset class or combination of asset classes, depending on the system.
Herein, we refer to two types of portfolios: an “initial portfolio” and a “target portfolio.” We use the term “initial portfolio” to refer to a portfolio of one or more positions, wherein the portfolio itself may be considered the starting point. We occasionally refer to the one or more positions held within an initial portfolio as one or more “initial positions.” Quite often, we provide examples wherein the portfolio used to represent an initial portfolio is a currently held portfolio. However, an initial portfolio may be any starting portfolio, including a portfolio held in the past or to be held in the future, etc. We apply the term “target portfolio” to refer to a portfolio of one or more positions, wherein the portfolio itself may be considered the ending point, the end goal, the target, etc. We will occasionally refer to the one or more positions held within a target portfolio as one or more “target positions.” Initial portfolios and/or target portfolios may further be specified to be portfolios that exist at a certain day and time, portfolios that exist pending market or other conditions or events, or by any other criteria.
As used herein, the terms initial portfolio and target portfolio are typically used in combination or as part of the same examples. In one example, a user starts with an initial portfolio of five stocks, and wishes to change his positions held such that at some point in the future he will hold a target portfolio of seven stocks. In another example, a user starts with a current portfolio (an initial portfolio) of two different futures contracts and the user wishes to reverse his positions in the market towards a target portfolio of the same two futures contracts, but with the opposite side of market position. In still another example, a user holds no positions currently, but has stop-orders working in the market which will, pending market action, give the trader an initial portfolio of one or more positions at some point in the future. The user may wish to go from this initial portfolio to be acquired in the future, to a different target portfolio, which may be otherwise specified. In another example, the initial portfolio may be specified to be the user's currently held portfolio at two minutes before the closing time of the stock market, which may be four hours from the current time, in which case the positions (or initial positions) held within that initial portfolio would be the positions held at that specific time. Further as part of this same example, the target portfolio may be a specific list of stocks. In this example, while the initial portfolio may contain variable initial positions, the target portfolio may have specific target positions.
The initial and target portfolios may have exactly the same tradable instruments associated with the positions contained in the portfolios. Further, the initial and target portfolios may have overlapping but not all the same tradable instruments associated with the positions contained in the portfolios. Still further, the initial and target portfolios may have no tradable instruments in common associated with the positions contained in the portfolios. Similarly, initial and target portfolios may have positions, associated with same or different tradable instruments, which are on the same or opposite sides of the market (long or short), and may further have positions, associated with same or different tradable instruments, which have same or different quantities.
Even though the current pitfalls of order-entry systems exist when traders want to take their account to a state where there exists only one target position as part of a target portfolio, the pitfalls are easier to see when we discuss examples wherein traders need to take their account towards a more complex target portfolio. Further, the process is even more complex when traders start with a larger or more complex initial portfolio as well.
Using current technologies, if a trader wishes to take his account from an initial portfolio to a target portfolio, many steps are typically required. See the example displayed in FIG. 1, which is split into three main sections. Shown on the left side of FIG. 1 is an example of an initial portfolio. Shown on the right side of FIG. 1 is an example of a target portfolio. Shown in the middle of FIG. 1 is a section labeled “orders required to go from entire initial portfolio to entire target portfolio.” This middle section of FIG. 1 is an example of how many tasks traders may have to perform manually while trading, if they wish to go from an initial portfolio to a target portfolio. In the example shown in FIG. 1, we assume that the trader wishes to start with an initial portfolio exactly as shown in FIG. 1, and end up with their entire target portfolio exactly as is shown in FIG. 1.
In order for the trader to determine what transactions need to be executed in the account under this scenario, the trader may first identify all tradable instruments which exist in the initial portfolio but not the target portfolio (in the example shown in FIG. 1, tradable instruments “AAA” and “BBB”) and prepare orders to liquidate these positions using the appropriate orders (cover/sell), quantities, and order types (limit/market/etc). Note that in the last column shown in the middle section of FIG. 1 labeled “Type of Transaction Required”, the type of transaction listed for tradable instruments “AAA” and “BBB” is liquidate.
The trader may next identify all tradable instruments which exist in both the initial portfolio and the target portfolio (in this example, tradable instruments “CCC”, “DDD”, “EEE”, “FFF”, “GGG”, “HHH”, “III”, “JJJ”, “KKK”, “LLL”) and figure out if the sides of the position (long/short) and quantities differ. If they do differ, the trader must calculate the order types (buy/cover/sell/short), order quantities, and types of order (limit/market) required to change the market position for each tradable instrument. Note that in the last column shown in the middle section of FIG. 1 labeled “Type of Transaction Required”, the type of transaction required varies for each order. Also note that for some tradable instruments, multiple transactions may be required, which can be seen for tradable instruments “JJJ” and “LLL” shown in FIG. 1. The reason multiple transactions may be required is that certain order-entry systems restrict the trader from crossing the zero-line, or going from short to long or long to short in one order.
The trader may further identify all tradable instruments which exist in the target portfolio but not initial portfolio (in this example, tradable instruments “MMM”, “NNN”, and “000”) and prepare orders to add these positions using the appropriate order types (buy/short), quantities, and type of order (limit/market). Note that in the last column shown in the middle section of FIG. 1 labeled “Type of Transaction Required”, the type of transaction listed for tradable instruments “MMM”, “NNN”, and “000” is add.
It should be noted that using the presently available systems, the list of orders required to go from the initial portfolio to the target portfolio, as shown in FIG. 1, needs to be manually calculated by the trader. It might take the average trader several minutes to compile the above list of required orders and associated conditions. Further, the trader will still have to place each of these orders individually. Even though sometimes traders have the luxury of time; most other times, time itself is a significant cost. Profits and losses may swing wildly as the markets fluctuate, and there is no reason that traders should be focusing on such mundane processes which could instead be automated. The trader's required order calculations and methods of order-entry are time consuming, error prone, annoying and quite often flat-out risky. With so much of the trader's attention and actions required to be allocated towards the manual processes which have been discussed, the trader is less focused on the market, and performance is severely impaired.
Existing order-entry systems which offer portfolio trading, i.e. trading more than one tradable instrument at a time using only one function, typically offer basket orders. Basket orders are ways in which traders can submit multiple orders at once by compiling orders into groups, or baskets, ahead of time. Traders must typically specify the tradable instruments, order type (buy/sell/short/cover), quantities, market/limit specification, and optionally other conditions as part of setting up each order to go into their basket. Because the orders themselves are required to be known ahead of time, basket orders do not address our problem where traders know what their target positions (portfolios) are, but they don't know what orders are required to reach these target positions and must calculate the orders manually. Therefore basket orders do not provide the solutions to the problems presented herein.
Because traders do not have methods at their disposal to trade to target portfolios, they have essentially two options. They may either still create their target portfolios, and then manually calculate the orders required to reach their target portfolio based on any initial portfolio. Or, they may skip this process, and instead start placing orders to try to get close to their preferred target portfolios. We have already discussed the first option in detail, and the time it will take towards generation of a list of orders required. If traders use the second option, while they may be faster to place their first orders, they may end up miscalculating the quantities to use for orders, they may end up taking improper amounts of risk on certain positions compared to others, and may further submit orders in error based on a lack of preparation.
In addition to the problems identified above with respect to trading to a target portfolio, existing trading systems and methods are not well adapted to execute complex multi-step processes and/or macros. For example, it is not so common for trading software to allow users to combine multiple functions into macros. However, for the platforms that do allow this, when it comes to run-time, these platforms will typically run the full macro upon a user-trigger. In other words, if a command to execute a macro is received, then the macro is executed in full, unless there is an error or some sort of break in the process. Some trading software platforms may allow users to turn the functionality of macros on or off in full; however, even if so, note that this is typically at the platform level. So if the functionality of macros within the platform is on, then if an input command to run a macro is received, then the entire macro is typically run in full.
Further problems with current trading methods exist because, as discussed, most trading systems are order-centric. As part of the order-entry process, existing methods require traders to specify the order (buy/sell/cover/short), the side of market applied and/or other specifications. These steps complicate the trading process and inhibit trader efficiency. For example, in many situations traders have the intention of performing an action regardless of the order required to complete the action. In one example, sometimes traders want to add to an existing position in their account, liquidate an existing position from their account, or reverse an existing position in their account.
In other examples, traders wish to cancel orders on the same side or the opposite of their existing position. In each of these situations, it is easily understood that the type of order (buy/sell/cover/short) required to be used for orders, or the side of market required to be used for other types of actions, is easy to determine when the user's position in the market is known. In addition, traders intend to perform an action on the same side of the market on which they currently hold a position; other times traders intend to perform an action on the opposite side of the market from which they currently hold a position. The action a trader intends to perform may be an order, a cancel of an order, or another action. However, existing trading software still requires the specification of the order type for orders, and if for other non-order actions (e.g. cancel buys or sells), still requires the specification of the side of market (buy or sell side) to apply within the function. This is an unnecessary requirement in many circumstances, and for reasons of trader efficiency and avoidance of errors, should be avoided whenever possible. However, there is currently no solution for this in the current market. What traders need is a quicker path to get orders to market; and a faster way to submit non-order actions such as cancel requests, i.e. they need for wasteful parts of the trading process to be eliminated whenever possible. In a primary example, traders need a way to send orders for a specific action, and have the system select which order type or side of market to apply the action towards.
As described, existing trading software has traders focusing on the order planning, order calculation, and order-entry processes. These order-centric methods are overly time-consuming and error-prone, and lead to reduced profitability for traders. Accordingly, there is a need for a system and method whereby a trader can specify a target portfolio of one or more target positions, and be able to execute the process of reaching these target portfolios from any initial portfolio with ease, efficiency, and accuracy. Further, in coordination with the need for traders to trade to target portfolios from any initial portfolio, there is an associated need for traders to be able to reach other target conditions as well. Further, traders are expected to benefit by applying various methods of selectively executing individual processes (either themselves or within more complex or multi-step processes), as well as methods in which user input of order types and side of market are not required steps of the trading process.